Macroeconomics

UNEMPLOYMENT, PHILLIPS CURVE

Philips Curve
Unemployment
Business cycles (inflationary and
recessionary gaps)and growth are directly
related to unemployment in the economy.
Unemployment occurs when people are
looking for a job and cannot find one.

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Unemployment Rate
The unemployment rate is the percentage
of people in the economy who are willing
and able to work but who are not working.

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Types of Unemployment
Cyclical unemployment results from fluctuations in economic activity.
Structural unemployment is caused by economic restructuring, making some skills obsolete.
Full employment an economic climate in which just about everyone who wants a job can have
one.
Frictional unemployment is the unemployment caused by new entrants into the job market and
people quitting a job just long enough to look for and find another one.
The target rate of unemployment (sometimes called the natural rate of unemployment or Non-
Accelerating Inflation Rate of Unemployment or NAIRU) is the lowest sustainable rate of
unemployment that policymakers believe is achievable under existing conditions.

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NAIRU
Philips curve uses nominal annual wage
growth of employees as measure of inflation.
With a change in expected level of inflation to
a higher level, more people join work force
due to expectation of higher wages (B).
When inflation actually moves up later in line
with expectations, the real wage rate falls.
Fall in real wage rate discourages the newly
joined work force who came in expecting
higher wage rate, both nominal and real.
They go back, reverting unemployment to
NAIRU, now at a higher inflation rate (C).
Whose Responsibility Is Unemployment?
Classical economists believe that individuals are responsible for their own
employment.
They argue that every person can find some job at some wage, so all
unemployment is frictional.
Keynesian economists tend to say that society owes a person a job
commensurate with the individual's training or past job experience.
They argue that jobs should be closer to home, so people do not have to move.
According to this view, unemployment is mainly cyclical and structural.

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Okuns Law

Okun's law (named after Arthur Melvin Okun,

who proposed the relationship in 1962) is an
empirically observed relationship between
unemployment and losses in a country's
production.